China-EU deal could be game-changer: Andy Xie

Commentary: Trade agreement could boost China’s reforms

By

AndyXie

BEIJING (Caixin Online) — China and the European Union should negotiate a comprehensive free-trade agreement (FTA) to solve bilateral disputes. Such an agreement could spark an investment boom in both economies and help them climb out of the current downturn.

The EU could see a closing of its trade deficit with China through such an agreement. China’s emerging middle class could sustain higher demand for European food products and branded goods. Chinese tourism, if opened up further beyond group tours, could bring billions of euros to the EU economy quickly.

About Caixin
Caixin is a Beijing-based media group dedicated to providing high-quality
and authoritative financial and business news and information through
periodicals, online and TV/video programs.
• Get the Caixin
e-newsletter

China could use the process of reaching such an agreement to reform the domestic economy. Trade barriers sustain the inefficiencies in China’s domestic economy. Without an export boom to offset them, such inefficiencies are weighing down China’s economy. When the door to foreign trade is opened wider, China’s economic efficiency improves.

Joining the World Trade Organization anchored China’s domestic reform a decade ago and laid the foundation for the boom afterwards. China needs a similar anchor to move the reform forward. Negotiating an FTA with the EU might just fit the bill.

China and EU: Best partners

China is the EU’s second-largest trading partner and the largest source of imports, and the EU is China’s largest trading partner. While the Sino-U.S. trade gets much more attention, China’s exports to the EU are much bigger.

Even though the EU’s recent action against China’s solar-panel exports has received widespread attention and stoked the fear of a trade war, China and the EU have been excellent trading partners. Without much fanfare, bilateral trade has risen from nothing two decades ago to the second biggest in the world.

In addition to trade, financial performance on the EU’s foreign direct investment (FDI) in China is a bright spot in its troubled economy. While the data are murky, Europe’s auto industry may earn most of its profits in China. Brands like Zara and H&M have become rooted in China, selling locally made products.

Chinese tourism is sustaining Europe’s luxury industries, like French bags and Swiss watches. A decade ago I wrote about the coming boom of Chinese tourism. It received widespread attention in Europe. The reality has surpassed my expectations. The excessive concentration of Chinese spending in luxury goods is not all positive. But there is much room for improvement.

Reuters

A shipping container area at the Port of Shanghai,

Tension of EU’s trade deficit

According to EU statistics, its trade deficit with China has averaged 155 billion euros ($207 billion) per annum in the past five years, or 1.2% of its GDP.

The EU recognizes that the figure may be distorted by rearrangements to the supply chain in Asia. While East Asia’s share in the EU’s imports has remained the same, China’s has gone up. China’s trade surplus with the EU can be explained by Japan and Korea shifting product assembly to China.

The EU has an unemployment rate of 12.2%. It is extremely high by historical and international standards. When an economy faces such a high unemployment rate, the economies that run big surpluses against it become targets for protectionism.

The dispute over China’s exports of solar panels could be viewed in that context. Considering the severity of its economic situation, the EU has been quite restrained in protectionism. The solar-panel dispute is the biggest so far. China should recognize that.

FTA is the way forward

Countries become receptive to FTAs when their economies are strong, as a strong economy can handle the downside risk from a new FTA. China and the EU are facing economic difficulties. It does not seem like a good idea to pursue an FTA now.

But, China and the EU may experience economic difficulties for years to come and need the upside potential from an FTA to pull them up. It is quite possible that a comprehensive FTA between the two could generate enough economic gains to pull them out of their current difficulties.

After two decades of rapid trade growth, China and the EU are largely complementary to each other. China’s competitive advantages are in labor and capital costs. Europe has pretty much adjusted to that. The labor-intensive industries in Southern European countries and the capital-intensive commodity industries in Northern European countries are mostly gone. An FTA between the two would be mostly gains.

China needs fair treatment in asset acquisitions in Europe. Demographics will keep China a large exporter of capital in the next decade and beyond. It would be wise for China to park a big chunk of its surplus savings in the EU. Purchases of European companies by Chinese companies or financial investors would be a good way to achieve it. Dispelling suspicion over Chinese investment would be beneficial to both.

The EU is concerned about market access and transparency. Chinese state-owned enterprises have a big influence on the government and can block import competition in many ways, not just through tariffs. And the process of such anti-competitive measures is murky.

There is little doubt that, if China wants the upside from an FTA with the largest economy in the world, it must open its books and put everything on the table for negotiations.

China-EU FTA can change the world

Free trade has stalled since the 2008 global financial crisis. The WTO’s Doha round is going nowhere. There have been various regional attempts to move free trade ahead. All seem to have stalled.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.